Watson, from Guernsey, suffered an elbow injury in her second-round clash at the warm-up tournament in Auckland with Kiki Bertens, which she lost 6-4 3-6 6-3.
She also played doubles with home player Marina Erakovic on the same day in New Zealand, but again lost, this time to Cara Black of Zimbabwe and Anastasia Rodionova of Australia.
The 20-year-old Tweeted: "I injured my elbow in my singles match, I have to withdraw from Hobart. Doing everything I can to get healthy."
Watson's problem has forced her to withdraw from the upcoming Moorilla Hobart International and puts into doubt her participation at the Australian Open, which gets under way on January 14.